On 1 December 2020, the revised duty to publish an approved prospectus in accordance with the Financial Services Act and the Financial Services Ordinance became fully effective. A remarkable novelty of the new Swiss prospectus regime is the introduced set of explicit exemptions and alleviations from the duty to publish a prospectus, which are largely in line with the Prospectus Regulation (earlier, the Prospectus Directive) of the European Union. This article discusses the exemptions and alleviations from the duty to publish a prospectus under the new Swiss prospectus regime from a practical perspective.

By Valentin Jentsch (Reference: CapLaw-2020-70)

1) Introduction

In a series of earlier articles in this newsletter (CapLaw 2016-1, CapLaw 2017-1, CapLaw 2018-56, CapLaw 2019-51), Christian Rehm and René Bösch introduced the new Swiss prospectus regime. In this article, I will take a closer look at exemptions and alleviations from the duty to publish a prospectus. My main point is that exemptions from the duty to publish a prospectus have passed the acid test, but also that alleviations from the duty to publish a prospectus have missed the target, at least in part.

On 1 January 2020, the Financial Services Act (FinSA) and the Financial Services Ordinance (FinSO) entered into effect. Since FINMA licensed the reviewing body for prospectuses with effect from 1 June 2020, triggering the statutory transition period of six months, the duty to publish an approved prospectus, together with the respective rules and regulations, became fully effective on 1 December 2020.

It is fair to say that the new prospectus regime represents a veritable paradigm change to Swiss financial market law. In comparison with previously applicable rules and regulations in Switzerland, a remarkable novelty of the new financial market architecture is the explicit stipulation of exemptions and alleviations from the duty to publish a prospectus in accordance with article 35 FinSA. These exemptions and alleviations were largely inspired by international standards, embodied in the Prospectus Directive (applicable at the time) and the Prospectus Regulation (applicable today) of the European Union.

In this article, I discuss these exemptions and alleviations from a practical perspective. From the variety of open issues, the article seeks to provide a broad conceptual analysis of those legal institutions, but also to clarify selected questions of interpretation regarding the newly introduced rules and regulations.

2) Exemptions from Duty to Publish a Prospectus

a) System of Prospectus Exemptions

i. Exemptions for Public Offer by Type of Offering

According to legislative materials, exemptions by type of offering are to be understood conclusively. Consequently, a total of six exemptions can be distinguished. If the requirements of a private placement exemption are given, a public offer can be made without publishing a prospectus. Pursuant to relevant legislative materials, all these exemptions are justified from the perspective of investor protection and for reasons of proportionality.

– Article 36(1)(a) FinSA applies to public offers that are exclusively addressed at investors classified as professional clients within the meaning of article 4(3) FinSA. From a practical perspective, this exemption is of particularly high relevance.

– Article 36(1)(b) FinSA relates to public offers that are addressed at fewer than 500 investors. Other than in Europe, it is arguably not possible to combine the 500 exemption with the exemption for professional clients. First, Swiss law does not provide for this option. Second, the threshold of 500 is much higher than 150. Apart from that, the 500 exemption is apparently not very practical, if the offering is handled by a consortium of investment banks, as such banks hardly ever let each other look into their books.

– Article 36(1)(c) FinSA refers to public offers that are addressed at investors acquiring securities to the value of at least CHF 100,000. Assuming that wealthy investors are more sophisticated and thus need no protection, this exemption is somewhat similar to, but still different from, the professional clients exemption mentioned above.

– Article 36(1)(d) FinSA is available for public offers with a minimum denomination per unit of CHF 100,000. This exemption is particularly important for bonds and other debt instruments.

– Article 36(1)(e) FinSA covers public offers not exceeding a total value of CHF 8 million over a 12-month period. Due to these thresholds, it can be expected that mainly small and medium-sized enterprises or start-up companies will claim this exemption.

– An additional exemption, which is applicable to financial service providers only, is enacted in article 36(4) FinSA. It is restricted to securities offered publicly at a later stage and requires (a) existence of a valid prospectus, and (b) consent for use of the issuer or persons, who have assumed responsibility for the prospectus, within the meaning of article 45 FinSO.

Article 36(5) FinSA contains a delegation clause, which is unique in Swiss legislation to date. According to this clause, the Federal Council may adjust the number of investors and the amounts under letters (b) to (e) of article 36(1) FinSA, thereby taking account of recognized international standards and legal developments abroad. These rather tight restrictions reasonably limit delegation power.

ii. Exemptions for Public Offer by Type of Security

According to legislative materials, exemptions by type of security can be justified by the fact that investor protection in the form of a prospectus is not necessary in all these cases, since investors are sufficiently protected or at least informed about these securities in another, comparable way. This list of exemptions is relatively long and at first glance perhaps somewhat opaque.

– First of all, article 37(1) FinSA applies to equity securities (a) issued outside the scope of a capital increase in exchange for previously issued equity securities of the same class, (b) issued or delivered on the conversion or exchange of financial instruments of the same issuer or corporate group, or (c) issued or delivered following exercise of a right linked to financial instruments of the same issuer or corporate group. With a view to practical relevance, convertible or exchangeable bonds and similar instruments are among the most likely candidates claiming this exemption.

– Article 37(1) FinSA also applies to securities (d) offered for exchange in connection with a takeover, or (e) offered or allocated in connection with a merger, division, conversion, or transfer of assets, provided that information equivalent in terms of content to a prospectus is available. With regard to the equivalence requirement, which is defined in article 46(1) FinSO, it is interesting to note that pursuant to article 46(3) FinSO, information in a prospectus for public exchange offers is deemed to be equivalent under these rules and regulations, but this assumption does not exist for the documentation relating to mergers and other corporate restructurings.

– Article 37(1)(f) FinSA is applicable to equity securities distributed as dividends to holders of equity securities of the same class, provided that there is information on the number and type of equity securities and on reasons for and details of the offer. For such dividends, in cases where there is no election by shareholders between dividend in kind and cash dividend, the exemption does not have to be relied on in the first place because there is no (public) offer at all.

– Without further requirements, article 37(1)(g) FinSA relates to securities offered or allocated to current or former members of the board of directors or management board or to employees. The logic behind this exemption is that there are other means of protection vis-à-vis employers that do not warrant another protection by way of disclosure.

– With a view to the type of issuer, article 37(1)(h) FinSA covers securities issued by, or with an unlimited and irrevocable guarantee from, the Confederation or cantons, an international or supranational public entity, the Swiss National Bank, or foreign central banks. It is unfortunate that municipal public entities (in particular large cities) were not included in the list; this should be amended, even though investors are often not so well informed about municipalities.

– Due to a lack of significant threat to investor protection, article 37(1)(i) FinSA refers to securities issued by non-profit institutions for raising funds for non-commercial purposes.

– Finally, article 37(1) FinSA is available for (j) medium-term notes, (k) money market instruments, and (l) derivatives not offered in the form of an issue. These exemptions are convincingly formulated and make sense.

Article 37(2) FinSA contains a delegation clause, which is more comprehensive than the one discussed above. Pursuant to this clause, the Federal Council may provide for additional exemptions from the duty to publish a prospectus for further types of publicly issued securities, again taking account of recognized international standards and legal developments abroad. This clause is certainly not unproblematic, as it considerably weakens the rule of law. After all, it allows a rather fast change of the regime in FinSO as compared to a change of FinSA itself.

iii. Exemptions for Admission to Trading

Exemptions for admission to trading are mostly adapted to the corresponding European rules and regulations. However, they take into account certain specialties of the Swiss capital market. This includes in particular exemptions by type of security, since only those are controllable by a trading venue.

– Article 38(1)(a) FinSA covers equity securities that over a period of 12 months account for less than 20% of the number of equity securities of the same category already admitted to trading on the same trading venue. Compared to the previously applicable standard in the Listing Rules of SIX Swiss Exchange, this exemption represents a significant expansion in size. However, the exemption does no longer apply to increases of debt instruments.

– Article 38(1)(b) FinSA applies to equity securities issued upon conversion or exchange of financial instruments or following the exercise of rights linked to financial instruments, provided that those equity securities are equity securities of the same category as those already admitted to trading. This is the case, if essential characteristics of equity securities are basically identical.

– Article 38(1)(c) FinSA relates to securities admitted to trading on a foreign trading venue, provided that such venue’s regulation, supervision, and transparency are acknowledged as being appropriate by the domestic trading venue, or transparency for investors is ensured by other means. The concept of recognized foreign trading venue is specified in article 48 FinSO. Similarly, article 47 FinSO relates to securities admitted to trading on another Swiss trading venue.

– Article 38(1)(d) FinSA refers to securities for which admission is sought for a trading segment open exclusively to professional clients, provided that such investors are trading for their own account or for the account of other professional clients. This exemption is also legitimate – yet, no such segment exists today.

Article 38(2) FinSA further provides that exemptions from the duty to publish a prospectus by type of offering and by type of security apply by analogy to admission to trading. Article 49 FinSO specifies, where and to what extent this is the case. However, looking at the wording of article 49 FinSO, it should not be assumed that this provision is exhaustive because, i.e., the minimum denomination exemption could also be applicable in this respect.

b) Equal Treatment of Investors

Article 39 FinSA provides equal treatment with regard to information. Pursuant to this provision, which applies to information beyond the scope and in the absence of a duty to publish a prospectus, offerors or issuers shall treat investors alike, when sending them essential information on a public offer. As briefly discussed here, this provision gives rise to many conceptual issues and interpretative questions.

On a conceptual level, it is important to note that this provision does in fact not add anything new, as the equal treatment of investors follows already from the (unwritten) general principle of capital market law on equal treatment of market participants in general and investors in particular. Just like this general principle of law, article 39 FinSA requires no absolute equality, but only relative equality (no selective disclosure). Under certain circumstances, a differentiated treatment of various investors can be justified. It is required, however, that such treatment is based on objective reasons and proportionate. An objective reason may be given, if such action lies in the best interest of all investors, or if investor protection is ensured by other means.

In addition, the scope of application of article 39 FinSA is unclear. With regard to the personal scope of application, reference is made to offerors and issuers, suggesting that there is a public offer or admission to trading. With respect to the material scope of application, the wording clearly refers to essential information on a public offer. In addition, both the heading (information beyond the scope of the duty to publish a prospectus) and the introductory sentence (in the absence of a duty to publish a prospectus) indicate that there is no need for an offer at all.

Consequently, article 39 FinSA not only applies to private placements, which benefit from an exemption from the duty to publish a prospectus, but also to other capital market transactions, in which no public offer was made and no admission to trading was sought in the first place. Therefore, this provision, which is designed to prevent unjustified selective disclosure, also includes the process of an accelerated bookbuilding and blocktrades in particular.

3) Alleviations from Duty to Publish a Prospectus

a) General-Abstract Approach to Abridgments

i. Alleviations by Type of Issuer

The general-abstract alleviations by type of issuer, which provide for certain abridgments, are largely in line with European rules and regulations, while at the same time taking into account particularities of the Swiss market.

– Article 47(1) FinSA applies to economically less important companies, in particular small and medium-sized enterprises. FinSO annexes 1 to 5 all include alleviations for such companies, but the abridgments are practically inexistent.

– Article 47(2)(a) FinSA relates to small caps, i.e., issuers with low market capitalization on a trading venue. FinSO annexes 1 to 5, however, do not contain any alleviations and abridgments for small caps.

– Article 47(2)(c) FinSA refers to well-known seasoned issuers, i.e., issuers that regularly offer securities publicly, or whose securities are admitted to trading on a foreign trading venue, whose regulation, supervision, and transparency are acknowledged as being appropriate by a domestic trading venue. Article 57(2) FinSO defines well-known seasoned issuers as issuers that (a) have been listed with equity securities on the Swiss benchmark index for at least 2 years, and (b) have debt instruments outstanding with a total par value of at least CHF 1 billion. FinSO annexes 1 to 5 all include alleviations and several abridgments for well-known seasoned issuers.

– Moreover, article 47(2) FinSA may also be applicable to other issuers, e.g., start-up or growth companies. Other than the European rules and regulations, FinSO annexes 1 to 5 do not contain any alleviations and abridgments specifically for such companies.

In addition, article 47(3)(e) FinSA provides that alleviations by type of issuer shall be granted uniformly and with respect to business activities and size of issuers. At least to some extent, this rule enables the consideration of particularities of start-up or growth companies.

ii. Alleviations by Type of Offering

The general-abstract alleviations by type of offering, which also provide for certain abridgments, are perfectly congruent with the European rules and regulations and with the previously applicable Listing Rules of SIX Swiss Exchange.

– Article 47(2)(b) FinSA covers and FinSO annexes 1, 4, and 5 include alleviations by type of offering. According to those schemes, some abridgments are available for issues of subscription rights in particular, but not for rights issues in general.

– In my opinion, however, article 47(2)(b) FinSA also covers issues of advance subscription rights. Therefore, similar abridgments should be included in FinSO annex 2.

In addition, article 47(3)(b) FinSA provides that alleviations by type of offering shall be granted uniformly and with respect to issue volume. This makes perfect sense, as existing investors are less affected by smaller offers.

iii. Alleviations for Other Reasons

Providing for further abridgments, the general-abstract alleviations for other reasons include in particular alleviations by type of transaction, but also alleviations by type of security, for the market, and for investors.

– Article 47(2) FinSA implicitly allows and FinSO annexes 1 to 5 include alleviations by type of transaction. According to these regulations, a few abridgments are available for a public offer without admission to trading and for the admission to trading without public offer.

– Article 47(2) FinSA implicitly permits further alleviations, e.g., by type of security, for the market, and for investors. However, FinSO annexes 1 to 5 do not contain any alleviations and abridgments of this kind, at least not in the current version.

After all, article 47(3) FinSA provides that alleviations for other reasons shall be granted uniformly and in particular with respect to (a) type of securities issued, (c) market environment, and (d) investors’ specific requirements for transparent information. In this respect, I am convinced that legal scholarship and capital market practice will point the way forward in the coming months and years.

b) Individual-Concrete Approach to Abridgments

Besides the general-abstract approach discussed above, another approach exists. Under the individual-concrete approach, the reviewing body is in charge of granting abridgments, i.e., by deciding whether and to what extent certain information need not be included in the prospectus on a case-by-case basis.

– Article 41(1)(a) FinSA applies to disclosure seriously detrimental to offerors or issuers. Besides disclosure being seriously detrimental, this alleviation requires that an omission would not mislead investors with regard to facts and circumstances essential to an informed assessment of quality of issuer and characteristics of securities. In practical terms, this alleviation may apply to a situation, where offerors or issuers are in the process of planning future transactions.

– Article 41(1)(b) FinSA relates to information of minor importance. Under this alleviation, information is only of minor importance, if it has no bearing on the assessment of business situation and main prospects, risks, and litigation of the issuer or guarantor and security provider. In practice, this alleviation may be relevant for changes of notes in financial statements.

– Article 41(1)(c) FinSA refers to securities traded on another trading venue. This alleviation covers securities traded on a trading venue, provided that issuer’s periodic reporting over the last 3 years complied with applicable financial reporting requirements. In my understanding, this alleviation only applies to public offers, as corresponding exemptions already exist with regard to admission to trading, notably in article 38(1)(c) FinSA and article 47 FinSO.

Pursuant to article 41(2) FinSA, the reviewing body may, to a limited degree, grant further alleviations, provided that interests of investors remain protected. Article 52(1) FinSO clarifies that it may depart from requirements in accordance with FinSO annexes 1 to 5. Article 52(2) FinSO specifies that it may grant further alleviations dependent on conditions such as incorporation of further or additional details. For example, where collateralized securities are issued, information of the issuer or guarantor is less important than information on the collateral.

4) Conclusion

From a practical perspective, capital market transactions by way of private placements have not always been crystal clear in the Swiss market. Following the role model of the European Union, Switzerland introduced a set of explicit exemptions as part of its new prospectus regime. Based on the analysis above, I tend to conclude that exemptions from the duty to publish a prospectus have passed the acid test. The codification of exemptions can be qualified as gain in legal certainty. However, what could and should be done better in the future relates to the clarification of the relationship between individual exemptions. To give an example, it still seems controversial in the legal literature, whether or not the exemption for professional clients can be combined with the 500 exemption. The same applies to exemptions from various other categories, e.g., the exemption for securities with a high denomination.

Since corporations not listed on a stock exchange are now confronted with considerable additional expenditures of time and costs, it was definitely appropriate to meet these challenges with simplified and proportionate prospectus requirements. In my analysis, however, I come to the conclusion that alleviations from the duty to publish a prospectus have missed the target, at least in part. The general-abstract approach underlying individual schemes on minimum content of the prospectus has clearly not succeeded. The individual-concrete approach is currently still under development, whereby an orientation to previous practice and other capital market transactions would be advisable. As a result, it can be stated that general-abstract checklists are often not helpful, as individual-concrete considerations in each case may be needed.

Valentin Jentsch (valentin.jentsch@rwi.uzh.ch)